Lloyds Banking Group (LLOY)

Dividend investors strike gold in record year for income

UK dividends soared by 14.3% year-on-year to £28.5 billion in the third quarter, according to the latest Dividend Monitor from Capita Asset Services.

The weak pound, which since last June's Brexit vote has fallen over 10% against both the US dollar and the euro, continues to be a silver lining for income investors, with around 40% of UK companies paying dividends in either dollars or euros.

Special dividends also contributed to the rapid increase, as they were two-fifths higher year-on-year. A big contributor was contract caterer Compass, which distributed £960 million on top of its regular dividend.

Underlying dividends, which exclude special dividends, reached £27 billion - the second largest underlying payout for any quarter ever.

Mining companies accounted for two-thirds of the total increase. After a period of high volatility, commodity prices began to rebound a year ago, driving mining profits higher.

Further, 12 sectors out of 17 paid more in the third quarter than a year ago. In industrial goods and support services, Rolls Royce (RR.) restored its payout, while BT's (BT.A) payout pushed the telecoms sector higher.

In the banking sector, Lloyds (LLOY) continued to provide most of the growth. When it comes to retail companies, Sainsbury's (SBRY) cut its payout due to poor profit performance, and Marks & Spencer (MKS) did not repeat its special dividend of last year. Meanwhile, Next (NXT) paid the second in a series of four special dividends.

Justin Cooper, chief executive of Shareholder solutions, part of Capita Asset Services, says: "We had high hopes for 2017, but the dividend seam is proving even richer than we expected, as the mining sector finds its footing again.

"Investors have struck gold as this year's haul easily smashes the previous record set in 2014. Generous payouts have been topped up by big exchange rate gains between January and June and very large special dividends, setting 2017 up to be a sparkling year.' However, he cautions that the lustre will dim markedly in the fourth quarter, as the potential for further upside surprise has diminished."

Cooper cautions that exchange rate gains will no longer provide a helping hand in 2018, unless the pound takes another jolt downwards as the Brexit talks unfold. Therefore, in 2018 the dividend outlook is likely to become gloomier.

This is not the only worry on the horizon. Another concern is that the UK stockmarket is heavily concentrated, with the top 10 shares in the FTSE 100 (UKX) paying around half of all dividends for the entire UK market.

In addition, research by Henderson Global Investors highlights that on average 70% of UK equity income funds hold all of the top 10 stocks - so fund managers are heavily reliant on those dividends continuing. Therefore, it may pay to diversify your income.

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.